QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37771

Acacia Communications, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

27-0291921

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Three Mill and Main Place, Suite 400

Maynard, Massachusetts 01754

(Address of principal executive offices)

(978) 938-4896

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒ (Do not check if a small reporting company)

Small reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 27, 2017, the registrant had 39,377,330 shares of common stock issued and outstanding.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, and these statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, forward-looking statements can be identified by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

regulatory developments in the United States and foreign countries, including under export control laws or regulations that could impede our ability to sell our products to certain customers or customers in certain foreign jurisdictions;

•

our ability to obtain and maintain intellectual property protection for our products; and

The foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, investors in our common stock should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and readers should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Acacia Communications, Inc. was incorporated on June 2, 2009, as a Delaware corporation. Acacia Communications, Inc. and its wholly-owned subsidiaries (the “Subsidiaries”) are collectively referred to as the Company. The Company is a leading provider of high-speed coherent interconnect products that are designed to improve the capacity, performance, intelligence and cost of communications networks relied upon by cloud infrastructure operators and content and communications service providers. The Company’s products include a series of low-power coherent digital signal processors and silicon photonic integrated circuits integrated into families of optical interconnect modules with transmission speeds ranging from 100 to 400 gigabits per second for use in long-haul, metro and inter-data center markets. The Company is also developing optical interconnect modules that will enable transmission speeds of one terabit (1,000 gigabits) per second and above.

The Company is headquartered in Maynard, Massachusetts, and has established wholly-owned subsidiaries in North America, Europe and Asia as part of the Company’s global expansion.

On May 18, 2016, the Company closed its initial public offering (“IPO”), in which the Company issued and sold 4,570,184 shares of common stock and certain selling stockholders sold an additional 604,816 shares, inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price per share to the public was $23.00. The Company received aggregate proceeds of approximately $97.8 million from the IPO, net of underwriters’ discounts and commissions, before deduction of offering expenses of approximately $4.3 million. The Company received no proceeds from the sale of shares by the selling stockholders. Upon the closing of the IPO, all shares of the Company’s outstanding redeemable convertible preferred stock (the “preferred stock”) automatically converted into 24,177,495 shares of common stock.

On October 13, 2016, the Company closed a follow-on public offering in which the Company issued and sold 1,210,302 shares of common stock and certain selling stockholders sold an additional 3,289,698 shares. The underwriters’ option to purchase up to an additional 675,000 shares from certain of the selling stockholders was not exercised. The price per share to the public was $100.00. The Company received aggregate proceeds of $116.8 million from the follow-on offering, net of underwriters’ discounts and commissions, before deduction of offering expenses of approximately $1.2 million. The Company received no proceeds from the sale of shares by the selling stockholders.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements include the accounts of Acacia Communications, Inc. and its Subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. For further information, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 23, 2017. There have been no significant changes in the Company’s accounting policies from those disclosed in the Annual Report on Form 10-K that have had a material impact on the Company’s condensed consolidated financial statements.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2016, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s condensed consolidated balance sheet as of September 30, 2017, its condensed consolidated income statements for the three and nine months ended September 30, 2017 and 2016, its condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016, its condensed consolidated statements of redeemable convertible preferred stock and stockholders’ equity for the nine months ended September 30, 2017 and 2016, and its condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016. All intercompany balances and transactions have been eliminated in consolidation. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to these three and nine-month periods are also unaudited. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides clarity about which changes to terms or conditions of a share-based payment award require modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in ASU 2017-09, effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, were early adopted by the Company in the third quarter of 2017. The amendments will be applied on a prospective basis to awards modified on or after the adoption date, none of which occurred during the third quarter of 2017.

Recently Issued Accounting Pronouncements

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium to the earliest call date in order to reduce diversity in practice and provide more decision-useful information. The amendments in ASU 2017-08 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early adoption permitted, and is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not anticipate that this guidance will have a material impact on its condensed consolidated financial statements because all of the Company’s callable debt securities held at a premium are already amortized to the earliest call date.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 320): Restricted Cash (“ASU 2016-18”). ASU 2016-18 will require amounts generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in ASU 2016-18 are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and must be applied using a retrospective approach with earlier adoption permitted. The Company expects its condensed consolidated statements of cash flows to be impacted by the amount of restricted cash held by the Company in each period.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in ASU 2016-16 are effective for fiscal years beginning after December 15, 2017, and must be applied using a modified retrospective approach with earlier adoption permitted for annual reporting periods for which financial statements have not yet been issued. The Company does not anticipate that this guidance will have a material impact on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The main provisions include presenting financial assets measured at amortized cost at the amount expected to be collected, which is net of an allowance for credit losses, and recording credit losses related to available-for-sale securities through an allowance for credit losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and must be applied using a modified retrospective approach with earlier adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize a right-of-use asset and lease liability on the balance sheet for virtually all leases. For the income statement, ASU 2016-02 retains a dual model requiring leases to be classified as either operating or financing leases. Operating leases will result in straight-line expense, and financing leases will have a front-loaded expense pattern with an interest expense component. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, and must be applied using a modified retrospective approach with earlier adoption permitted. The Company expects the adoption of ASU 2016-02 will increase both its assets and liabilities presented on its condensed consolidated balance sheets to reflect the right-of-use assets and corresponding lease liabilities, as well as increase its leasing disclosures. The Company is continuing its assessment and review of existing leases, as well as policy and process changes to support the new standard.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. ASU 2014-09 was initially to be effective for annual periods beginning after December 15, 2016, including interim periods within that period. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which delays the effective date of ASU 2014-09 by one year and allows for early adoption as of the original effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies certain principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606):Identifying Performance Obligations andLicensing, which clarifies certain guidance related to identifying performance obligations and licensing. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which addresses improvements to the guidance on collectability, noncash consideration and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which addresses clarifications and corrections in various areas, including contract costs and disclosures.

The Company has completed its initial evaluation of the impact that ASU 2014-09 could have on its condensed consolidated financial statements. As of September 30, 2017, the Company has not identified any accounting changes related to ASU 2014-09 that would materially impact the amount of its reported revenues as, upon adoption, most revenue will continue to be recognized at a point-in-time when control transfers which is similar to the current revenue recognition model. The Company plans to adopt this guidance on January 1, 2018, using the modified retrospective adoption method applied to those contracts that were not completed as of that date. As the Company finalizes its evaluation, it is also assessing any disclosure requirements and preparing to implement changes to accounting policies, business processes and internal controls to support the new standard.

3. FINANCIAL INSTRUMENTS

The following tables set forth the Company’s cash, cash equivalents and short- and long-term marketable securities as of September 30, 2017 and December 31, 2016 (in thousands):

Losses represent marketable securities that were in loss positions for less than one year.

December 31, 2016

Gross Unrealized

Amortized Cost

Gains

Losses(1)

Estimated Fair Value

Cash and Cash Equivalents

Marketable Securities

Cash

$

81,230

$

—

$

—

$

81,230

$

81,230

$

—

Money market funds

118,174

—

—

118,174

118,174

—

U.S. treasury bonds

15,017

—

(2

)

15,015

—

15,015

Commercial paper

49,673

—

—

49,673

5,997

43,676

Corporate debt securities

46,339

2

(27

)

46,314

1,001

45,313

Total

$

310,433

$

2

$

(29

)

$

310,406

$

206,402

$

104,004

(1)

Losses represent marketable securities that were in loss positions for less than one year.

The proceeds from the sales and maturities of marketable securities, which were primarily reinvested and resulted in realized gains and losses, were as follows (in thousands):

Three Months Ended September 30, 2017

Nine Months Ended September 30, 2017

Proceeds from the sales and maturities of marketable securities

$

77,053

$

177,353

Realized gains

$

3

$

7

Realized losses

$

(1

)

$

(1

)

The contractual maturities of short-term and long-term marketable securities held at September 30, 2017 and December 31, 2016 are as follows (in thousands):

September 30, 2017

December 31, 2016

Amortized Cost Basis

Aggregate Fair Value

Amortized Cost Basis

Aggregate Fair Value

Due within one year

$

173,395

$

173,388

$

104,031

$

104,004

Due after 1 year through 3 years

59,350

59,315

—

—

Total

$

232,745

$

232,703

$

104,031

$

104,004

At September 30, 2017, the Company believed that the unrealized losses on its available-for-sale investments were temporary. The investments with unrealized losses consisted primarily of corporate debt securities. In making the determination that the decline in fair value of these securities was temporary, the Company considered various factors, including, but not limited to: the length of time each security was in an unrealized loss position; the extent to which fair value was less than cost; the financial condition and near-term prospects of the issuers; and the Company’s intent not to sell these securities and the assessment that it is more likely than not that the Company would not be required to sell these securities before the recovery of their amortized cost basis.

Inventory consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017

December 31, 2016

Raw materials

$

27,554

$

14,385

Work-in-process

1,476

3,235

Finished goods

20,953

14,061

Inventory

$

49,983

$

31,681

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017

December 31, 2016

Engineering laboratory equipment

$

36,909

$

31,096

Computer software

1,751

1,381

Computer equipment

3,775

2,572

Furniture and fixtures

2,922

408

Leasehold improvements

2,341

1,032

Construction in progress

2,283

5,954

Total property and equipment

49,981

42,443

Less: Accumulated depreciation

(24,891

)

(17,319

)

Property and equipment, net

$

25,090

$

25,124

Depreciation expense was $3.3 million and $2.7 million for the three months ended September 30, 2017 and 2016, respectively, and $9.1 million and $6.5 million for the nine months ended September 30, 2017 and 2016, respectively.

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017

December 31, 2016

Employee-related liabilities

$

6,942

$

6,235

Outsourced foundry services

95

1,811

Goods and services received not invoiced

11,838

9,024

Accrued income taxes

940

670

Accrued manufacturing related expenses

7,982

5,255

Warranty reserve

3,419

2,158

Other accrued liabilities

5,306

4,710

Accrued liabilities

$

36,522

$

29,863

7. FAIR VALUE MEASUREMENT

The Company measures certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The Company’s cash equivalents consist of money market funds, repurchase agreements, commercial paper, certificates of deposit and corporate debt securities with an original maturity of three months or less. The Company’s investments in money market funds, repurchase agreements, commercial paper, certificates of deposit, asset-backed securities, corporate bonds and U.S. government agency debt securities, which are classified as Level 2 within the fair value hierarchy, were initially valued at the transaction price and subsequently valued at each reporting date utilizing market-observable data. The market-observable data included reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.

The fair value of these assets measured on a recurring basis was determined using the following inputs as of September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total Fair Value

Assets:

Money market funds

$

—

$

17,461

$

—

$

17,461

Repurchase agreements

—

25,000

—

25,000

U.S. treasury bonds

—

2,194

—

2,194

Commercial paper

—

54,522

—

54,522

Certificates of deposit

—

26,005

—

26,005

Asset-backed securities

—

26,689

—

26,689

Corporate debt securities

—

135,242

—

135,242

Total

$

—

$

287,113

$

—

$

287,113

December 31, 2016

Quoted Prices in Active Markets

(Level 1)

Significant Other Observable Inputs

(Level 2)

Significant Unobservable Inputs

(Level 3)

Total Fair Value

Assets:

Money market funds

$

—

$

118,174

$

—

$

118,174

U.S. treasury bonds

—

15,015

—

15,015

Commercial paper

—

49,673

—

49,673

Corporate debt securities

—

46,314

—

46,314

Total

$

—

$

229,176

$

—

$

229,176

There have been no transfers between fair value measurement levels during the three or nine months ended September 30, 2017.

For certain other financial instruments, including accounts receivable, restricted cash, accounts payable, and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

Preferred Stock Warrants

Prior to the closing of the Company’s IPO, the Company remeasured the fair value of its preferred stock warrants at each balance sheet date. Any changes in fair value were recognized as a component of other income (expense) in the condensed consolidated income statements. The valuation technique used to measure fair value for the Company’s preferred stock warrants, which were considered Level 3 fair value estimates within the fair value hierarchy, was the Black-Scholes option pricing model. The significant unobservable inputs used in the fair value measurement of the Company’s preferred stock warrants was the fair value of the Company’s series B and series C preferred stock. The Company also utilized risk-free interest

rate, expected dividend yield, expected volatility and expected term as observable inputs with the fair value of the series B and series C preferred stock in determining the fair value of the preferred stock warrants. There is not a direct interrelationship between the unobservable inputs and the observable inputs.

A summary of the changes in the Company’s preferred stock warrant liability measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016 is as follows (in thousands):

Nine Months Ended September 30, 2016

Preferred stock warrant liability at beginning of period

$

3,254

Change in fair value

3,361

Reclassification of preferred stock warrant liability to additional paid-in capital upon conversion to common stock warrants

$

(6,615

)

Preferred stock warrant liability at end of period

$

—

The warrants to purchase shares of preferred stock were converted into warrants to purchase shares of common stock upon the closing of the IPO.

8. STOCK COMPENSATION PLANS

The following table summarizes the classification of stock-based compensation in the condensed consolidated income statements for the three and nine months ended September 30, 2017 and 2016 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Cost of revenue

$

518

$

504

$

1,469

$

1,196

Research and development

3,743

3,782

10,516

9,360

Sales, general and administrative

2,159

2,389

5,177

5,580

Total stock-based compensation

$

6,420

$

6,675

$

17,162

$

16,136

The following table summarizes stock-based compensation expense by award type for the three and nine months ended September 30, 2017 and 2016 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Stock options

$

648

$

623

$

1,969

$

1,391

Restricted stock awards

29

29

87

76

Restricted stock units

5,412

5,740

14,224

14,235

Employee stock purchase plan

331

283

882

434

Total stock-based compensation

$

6,420

$

6,675

$

17,162

$

16,136

Stock Options

A summary of stock option activity under the Company’s equity incentive plans for the nine months ended September 30, 2017 is as follows:

As of September 30, 2017 and December 31, 2016, there was $5.5 million and $7.6 million, respectively, of unrecognized compensation cost related to unvested common stock options, which is expected to be recognized over weighted-average periods of 2.4 years and 3.1 years, respectively.

The weighted-average grant date fair value of stock options granted during the three and nine months ended September 30, 2016 was $34.82 and $10.97, respectively. No stock options were granted by the Company during the three or nine months ended September 30, 2017.

Restricted Stock Units

During the nine months ended September 30, 2017, the Company granted 537,000 restricted stock units (“RSUs”) to employees and executives under the 2016 Equity Incentive Plan that vest upon the satisfaction of a service condition, generally over four years. The cost of any RSUs with only a service condition is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

During the nine months ended September 30, 2017, the Company granted 461,000 RSUs to executive officers that include a market condition and a performance condition in addition to a service condition (“performance-based RSUs” or “PRSUs”). Each PRSU represents the right to receive one share of the Company’s common stock when and if the applicable vesting conditions are satisfied. The number of PRSUs that are subject to the service condition is determined based on the achievement of certain market and performance objectives over a two-year period running from January 1, 2017 through December 31, 2018 (the “Earned PRSUs”). Thirty-three percent of any Earned PRSUs will vest on the later of (i) March 17, 2019 and (ii) the date that the number of Earned PRSUs is determined by the Compensation Committee after December 31, 2018. Thereafter, an additional 33% of the Earned PRSUs will vest on March 17, 2020 and the remaining 34% of the Earned PRSUs will vest on March 17, 2021. Vesting of Earned PRSUs is subject to the applicable officer’s continued provision of services to the Company through the applicable vesting date. The number of PRSUs that become Earned PRSUs will be determined based on the extent to which the Company achieves (i) a revenue growth objective, based on the compound annual growth rate of the Company’s total revenue by measuring the Company’s revenue for fiscal year 2018 against the Company’s revenue for fiscal year 2016 (the “Revenue Growth Objective”), and/or (ii) a stock price objective during the two-year period (the “Stock Price Objective”). If neither the Revenue Growth Objective nor the Stock Price Objective is achieved, none of the PRSUs will become Earned PRSUs. Any PRSUs that do not become Earned PRSUs shall be forfeited once the number of Earned PRSUs is determined by the Compensation Committee after December 31, 2018.

For the PRSUs, the related stock-based compensation expense is amortized using the accelerated method over the vesting period of four years. The Company estimates the fair value of the PRSUs using management’s best estimate of whether it is probable or not probable that the Revenue Growth Objective will be satisfied using the most currently available projections of future revenue performance, which is reassessed at each reporting period. Changes in the subjective and probability-based assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the Company’s condensed consolidated income statements.

The Company estimated the fair value of the PRSUs using a Monte Carlo valuation model on the date of grant, using the following assumptions:

As soon as practicable following each vesting date of RSUs, including PRSUs, the Company will issue to the holder of the RSUs the number of shares of common stock equal to the aggregate number of RSUs that have vested. Notwithstanding the foregoing, the Company may, in its sole discretion, in lieu of issuing shares of common stock to the holder of the RSUs, pay the holder an amount in cash equal to the fair market value of such shares of common stock. To date, the Company has not settled any vested RSUs with cash.

A summary of the changes in the Company’s RSUs during the nine months ended September 30, 2017 is as follows:

RSUs

(in thousands)

Weighted-Average Grant Date Fair Value

Outstanding at December 31, 2016

2,034

$

21.09

Granted

998

$

54.20

Vested

(603

)

$

19.17

Cancelled

(8

)

$

29.35

Outstanding at September 30, 2017

2,421

$

35.19

The granted amount includes the 461,000 PRSUs which is the maximum number that were granted to executives during the nine months ended September 30, 2017.

As of September 30, 2017 and December 31, 2016, there was $51.9 million and $32.1 million, respectively, of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over weighted-average periods of 3.1 years and 3.4 years, respectively.

9. NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers its preferred stock to be participating securities. In the event a cash dividend is paid on common stock, the holders of preferred stock are also entitled to a proportionate share of any such dividend as if they were holders of common stock (on an as-if converted basis). The holders of the preferred stock do not have a contractual obligation to share in losses. In accordance with the two-class method, earnings allocated to these participating securities and the related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded from the computation of basic and diluted net income per share attributable to common stockholders. As a result of the conversion of preferred stock on May 18, 2016, no earnings were allocated to participating securities during the three and nine months ended September 30, 2017 or the three months ended September 30, 2016.

The following table sets forth the computation of the Company’s basic and diluted net income per share attributable to common stockholders (in thousands, except per share amounts):

The following common stock equivalents (in thousands) were excluded from the computation of diluted net income per share for the periods presented because including them would have been antidilutive:

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Options to purchase common stock

90

17

90

30

Unvested restricted stock units and awards

545

21

424

16

Preferred stock warrants

—

—

—

245

Employee stock purchase plan

48

—

—

—

As discussed further in Note 8, in March 2017, the Company granted 461,000 PRSUs to executives that include market, performance and service conditions. As the market and performance criteria associated with the vesting of those awards have not been satisfied as of September 30, 2017, the Company has excluded those shares from the table above and the calculation of diluted net income per share attributable to common stockholders.

10. COMMITMENTS AND CONTINGENCIES

Leases

The Company’s principal facilities are located in Maynard, Massachusetts and Holmdel, New Jersey and are leased by the Company under non-cancelable operating leases that expire in February 2025, with respect to the Massachusetts facility, and December 2021, with respect to the New Jersey facility. The Company also leases office space in various locations with expiration dates between 2018 and 2022. Several of the lease agreements include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance and maintenance costs. All of the Company’s facility leases are accounted for as operating leases. Rent expense is recorded over each respective lease term on a straight-line basis. Rent expense was $1.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $3.9 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively.

Future minimum lease payments due under these non-cancelable lease agreements as of September 30, 2017, are as follows (in thousands):

As of September 30, 2017, the Company was committed to approximately $0.9 million for additional construction build-out at the Maynard facility.

Warranties

The Company’s standard warranty obligation to its customers provides for repair or replacement of a defective product at the Company’s discretion for a period of time following purchase, generally between 12 and 24 months. Factors that affect the warranty obligation include product failure rates, material usage, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. The estimated cost associated with fulfilling the Company’s warranty obligation to customers is recorded in cost of revenue. Changes in the Company’s product warranty liability, which is included as a component of accrued liabilities on the condensed consolidated balance sheets, are set forth in the table below (in thousands). The reserves below do not include reserves established as a result of the manufacturing process quality issue described below under the heading “Manufacturing Process Quality Reserve.”

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Warranty reserve, beginning of period

$

4,859

$

1,306

$

2,158

$

763

Provisions made to warranty reserve during the period

3,483

2,334

9,456

4,120

Charges against warranty reserve during the period

(4,923

)

(1,531

)

(8,195

)

(2,774

)

Warranty reserve, end of period

$

3,419

$

2,109

$

3,419

$

2,109

Manufacturing Process Quality Reserve

In May 2017, the Company announced a quality issue at one of its three contract manufacturers that affected a portion of the units manufactured by the contract manufacturer over an approximate four month period, which at that time was estimated at approximately 1,300 AC400 units and 5,100 CFP units (the “Quality Issue”). Subsequently, the estimate of the potentially impacted units was increased to approximately 1,900 AC400 units and 7,000 CFP units, to include units manufactured but not yet shipped to customers, and based on an evaluation of such units, the Company established reserves to cover anticipated costs, including cost estimates for product repairs, rework of component inventory with the contract manufacturer and rescreening costs as a result of the Quality Issue. The Quality Issue warranty reserve of $1.1 million was recorded as a component of accrued liabilities in the Company’s condensed consolidated balance sheets as of September 30, 2017, and an additional $5.5 million was reserved against estimated affected inventory on-hand at the contract manufacturer and in-transit returns as of September 30, 2017. As compared to June 30, 2017, although the Company’s estimate of the number of potentially impacted units increased, better than anticipated testing data resulted in a decrease to the reserve. The Company’s estimates of the Quality Issue costs are subject to further change as customers continue to return potentially impacted units and final testing is performed.

Legal Contingencies

On January 22, 2016, ViaSat, Inc. filed a suit against the Company alleging, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing and misappropriation of trade secrets. On February 19, 2016, the Company responded to ViaSat’s suit and alleged counterclaims against ViaSat including, among other things, patent misappropriation, breach of contract, breach of the implied covenant of good faith and fair dealing, misappropriation of trade secrets and unfair competition, which ViaSat denied in its response filed March 16, 2016. The Company is continuing to evaluate ViaSat’s claims, but based on the information available to the Company today, the Company currently believes that this suit will not have a material adverse effect on the Company’s business or its condensed consolidated financial position,

results of operations or cash flows. On July 28, 2017, the Company filed a suit against ViaSat asserting commercial disparagement, libel, slander of title, unfair competition, intentional interference with advantageous relations and intentional interference with contractual relations. Both lawsuits are still pending and discovery is ongoing.

In August and September 2017, three purported securities class action complaints were filed in the U.S. District Court for the District of Massachusetts against the Company and certain of its executive officers (Murugesan Shanmugaraj and John Gavin). The complaints are captioned Tharp v. Acacia Communications, Inc., et al., Case No. 1:17-cv-11504 (D. Mass.), filed August 14, 2017; Zhang v. Acacia Communications, Inc., et al., Case No. 1:17-cv-11518 (D. Mass.), filed August 16, 2017; and Kebler v. Acacia Communications, Inc., et al., Case No. 1:17-cv-11695 (D. Mass.), filed September 7, 2017. Each complaint purports to be brought on behalf of an alleged class of those who purchased the Company’s securities between August 11, 2016 and July 13, 2017, and alleges that the defendants violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements regarding, among other matters, demand for the Company’s products, the Company’s financial guidance, and/or the Company’s quality control process as it relates to the Quality Issue. Each complaint seeks, among other relief, unspecified compensatory damages, attorneys’ fees, and costs.

On October 13, 2017, a fourth purported securities class action complaint was filed in the United States District Court for the District of Massachusetts against the Company, certain of its directors and executive officers (Murugesan Shanmugaraj, John Gavin, Francis Murphy, Eric Swanson, Peter Chung, Benny Mikkelsen, Stan Reiss, John Ritchie, Vincent Roche, Mehrdad Givehchi, John Lomedico, Bhupendra Shah and Christian Rasmussen), certain persons or entities that sold the Company’s common stock in the Company’s October 2016 follow-on public offering, and the underwriters of such offering, captioned Rollhaus v. Acacia Communications, Inc., et al., Case No. 17-cv-11988 (D. Mass). The complaint purports to be brought on behalf of an alleged class of those who purchased the Company’s common stock pursuant to or traceable to the offering, and alleges that the defendants violated Sections 11, 12(a)(2) and/or 15 of the Securities Act of 1933 by making allegedly false and/or misleading statements regarding, among other matters, demand for the Company’s products, the Company’s financial guidance, and/or the Company’s quality control process as it relates to the Quality Issue. The complaint seeks, among other relief, unspecified compensatory damages, rescission, attorneys’ fees, and costs.

The Company intends to engage in a vigorous defense of the class action lawsuits described above. However, the Company is unable to predict the ultimate outcome of these proceedings, and, therefore cannot estimate possible losses or ranges of losses, if any, or the materiality of any such losses. An unfavorable resolution of these matters in any reporting period may have a material adverse effect on the Company’s results of operations and cash flows for that period. In addition, the timing of the final resolution of these proceedings is uncertain. The Company will incur litigation and other expenses as a result of these proceedings, which could have a material impact on the Company’s business, condensed consolidated financial position, results of operations, and cash flows.

In addition, from time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on the Company’s business or its condensed consolidated financial position, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Indemnification

In the ordinary course of business, the Company enters into various agreements containing standard indemnification provisions. The Company’s indemnification obligations under such provisions are typically in effect from the date of execution of the applicable agreement through the end of the applicable statute of limitations. During the three and nine months ended September 30, 2017 and 2016, the Company did not experience any losses related to these indemnification obligations. The Company does not expect significant claims related to these indemnification obligations, and consequently, has concluded that the fair value of these obligations is not material. Accordingly, as of September 30, 2017 and December 31, 2016, no amounts have been accrued related to such indemnification provisions.

11. INCOME TAXES

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are reinvested indefinitely.

The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual tax rate changes, the Company makes a cumulative adjustment in that quarter. The Company’s quarterly tax provision, and its quarterly estimate of its annual effective tax rate, are subject to significant volatility due to several factors, including the Company’s ability to accurately predict its pre-tax income and loss in multiple jurisdictions, as well as the portions of stock-based compensation that will either not generate tax benefits or the tax benefit is unpredictable and reflected when realized by employees.

For the three months ended September 30, 2017, the Company recorded a benefit for income taxes of $8.6 million as compared to a tax provision of $2.1 million for the three months ended September 30, 2016, resulting in an effective tax rate of (87.4)% and 5.7% for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017, the Company recorded a benefit from income taxes of $24.6 million as compared to a tax provision of $5.9 million for the nine months ended September 30, 2016, resulting in an effective tax rate of (71.6)% and 8.1% for the nine months ended September 30, 2017 and 2016, respectively. The benefits for income taxes recorded in the three and nine months ended September 30, 2017 are mainly due to the favorable effect of foreign statutory tax rates applicable to income earned outside the United States under the Company’s corporate structure and the recognition of U.S. excess tax benefits from the taxable compensation on share-based awards. The Company’s historical provision for income taxes is not necessarily reflective of its future results of operations.

As of September 30, 2017 and December 31, 2016, the Company identified $4.6 million and $3.1 million, respectively, of gross uncertain tax positions. Included in those balances as of September 30, 2017 and December 31, 2016 are $2.5 million and $1.5 million, respectively, of tax benefits that, if recognized, would impact the effective tax rate. These have been accrued for as long-term liabilities on the Company’s condensed consolidated balance sheets. The Company’s existing tax positions will continue to generate an increase in unrecognized tax benefits in subsequent periods. The Company’s policy is to record interest and penalties related to unrecognized tax benefits as income tax expense. During the three and nine months ended September 30, 2017 and 2016, the amounts recorded related to the accrual of interest and penalties were immaterial in each period.

12. SEGMENT INFORMATION AND GEOGRAPHIC DATA

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s president and chief executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

Revenue by geographic region, based on ship-to destinations, was as follows (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

United States

$

11,333

$

25,644

$

47,561

$

65,660

China

37,234

55,665

123,583

143,017

Germany

21,171

37,333

43,786

82,054

Thailand

15,975

5,255

32,694

14,251

Other

19,285

11,407

50,939

31,003

Total revenue

$

104,998

$

135,304

$

298,563

$

335,985

Total long-lived assets by geographic region consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

Customers with revenue equal to or greater than 10% of total revenue for the three and nine months ended September 30, 2017 and 2016 were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

A

31

%

28

%

34

%

34

%

B

16

%

35

%

15

%

28

%

C

15

%

*

11

%

*

D

13

%

*

*

*

*

Less than 10% of revenue in the period indicated

Customers that accounted for equal to or greater than 10% of accounts receivable at September 30, 2017 and December 31, 2016 were as follows:

September 30, 2017

December 31, 2016

A

29

%

26

%

B

*

19

%

C

24

%

15

%

D

12

%

*

*

Less than 10% of accounts receivable at the date indicated

Supplier Concentration

The Company’s most significant vendor spending is related to purchases from contract manufacturers and component suppliers located in Japan, China, Thailand and the United States, from which the Company purchases a substantial portion of its inventory. For the three and nine months ended September 30, 2017 and 2016, total purchases from each of the suppliers was as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

W

*

*

25

%

*

X

20

%

42

%

22

%

43

%

Y

47

%

27

%

32

%

20

%

Z

*

18

%

15

%

19

%

*

Less than 10% of total purchases in the period indicated

The Company also outsources certain engineering projects to a vendor located in the United States. During the three months ended September 30, 2017 and 2016, the Company incurred 25% and 16%, respectively, of its total research and development costs with the U.S. foundry. During the nine months ended September 30, 2017 and 2016, the Company incurred 17% of its total research and development costs with the U.S. foundry.

One of the members of the Company’s Board of Directors, Vincent Roche, is also the President and Chief Executive Officer and a member of the board of directors of Analog Devices, Inc. (“ADI”). The Company, through its contract manufacturers, periodically purchases supplies from ADI pursuant to purchase orders negotiated on an arm’s length basis between ADI and the Company’s contract manufacturers at prevailing prices. These purchased supplies are used as content in certain of the Company’s manufactured products. During the three and nine months ended September 30, 2017 and 2016, the Company’s contract manufacturers made purchases from ADI of approximately $1.4 million, $3.5 million, $1.5 million, and $3.3 million, respectively.

One of the members of the Company’s Board of Directors, Peter Y. Chung, is also a member of the board of directors of M/A-COM Technology Solutions, Inc. (“M/A-COM”). The Company, through its contract manufacturers, periodically purchases supplies from M/A-COM. These purchased supplies are used as content in certain of the Company’s manufactured products. During the three and nine months ended September 30, 2017 and 2016, the Company’s contract manufacturers made purchases from M/A-COM of approximately $0.2 million, $0.7 million, $0.5 million, and $1.4 million, respectively.

15. SUBSEQUENT EVENTS

On October 13, 2017, a fourth purported securities class action complaint was filed in the United States District Court for the District of Massachusetts against the Company, certain of the Company’s directors and executive officers and others on behalf of an alleged class of purchasers of the Company’s securities. Refer to Note 10 for additional details of this action.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 23, 2017. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or if they prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A below.

Company Overview

Our mission is to deliver high-speed coherent optical interconnect products that transform communications networks, relied upon by cloud infrastructure operators and content and communication service providers, through improvements in performance and capacity and a reduction in associated costs. By converting optical interconnect technology to a silicon-based technology, a process we refer to as the siliconization of optical interconnect, we believe we are leading a disruption that is analogous to the computing industry’s integration of multiple functions into a microprocessor. Our products include a series of low-power coherent digital signal processor application-specific integrated circuits, or DSP ASICs, and silicon photonic integrated circuits, or silicon PICs, which we have integrated into families of optical interconnect modules with transmission speeds ranging from 100 to 400 gigabits per second, or Gbps, for use in long-haul, metro and inter-data center markets. We are also developing optical interconnect modules that will enable transmission speeds of one terabit (1,000 gigabits) per second and above. Our modules perform a majority of the digital signal processing and optical functions in optical interconnects and offer low power consumption, high density and high speeds at attractive price points.

For the three and nine months ended September 30, 2017 and 2016, we generated 79%, 72%, 82% and 79%, respectively, of our revenue from our five largest customers, the mix of customers varied across each period.

Results of Operations

The following tables set forth the components of our condensed consolidated income statements for each of the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of operating results is not necessarily indicative of results for future periods.

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

(in thousands)

Consolidated Income Statement Data:

Revenue

$

104,998

$

135,304

$

298,563

$

335,985

Cost of revenue(1)

58,856

72,004

170,739

183,327

Gross profit

46,142

63,300

127,824

152,658

Operating expenses:

Research and development(1)

27,135

18,915

67,597

56,168

Sales, general and administrative(1)

10,105

7,541

28,164

20,244

Gain on disposal of property and equipment

—

—

(47

)

—

Total operating expenses

37,240

26,456

95,714

76,412

Income from operations

8,902

36,844

32,110

76,246

Total other income (expense), net

969

166

2,202

(3,245

)

Income before (benefit) provision for income taxes

9,871

37,010

34,312

73,001

(Benefit) provision for income taxes

(8,628

)

2,122

(24,560

)

5,918

Net income

$

18,499

$

34,888

$

58,872

$

67,083

(1)

Stock-based compensation included in the condensed consolidated income statement data was as follows (in thousands):